Annuity Factor Method

AAA

DEFINITION of 'Annuity Factor Method'

A calculation method to determine the amount of eligible withdrawals that an investor can make from their IRA without incurring penalties. The calculation uses life-expectancy data; however, it utilizes different data than is used in the amortization method.

Using the annuity factor method, a retirement-account holder would divide the current IRA account balance by an "annuity factor." The annuity factor is calculated based on average mortality rates (using the mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "reasonable" interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

INVESTOPEDIA EXPLAINS 'Annuity Factor Method'

Using the annuity factor method, an investor can ensure that he or she does not lose account value to potentially costly penalties. It can also help an account holder determine how much money he or she may need to raise through other means (such as by securing a loan) in addition to withdrawing money from their retirement savings account to meet their current financial needs.

Withdrawing money from a retirement plan should be a careful decision as it gives the account holder less time to recoup value and earn interest on plan assets.

RELATED TERMS
  1. Annuity

    A financial product sold by financial institutions that is designed ...
  2. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  3. Annuitization Method

    A type of annuity distribution structure that gives the annuitant ...
  4. Early Withdrawal

    The removal of funds from a fixed-term investment before the ...
  5. Withdrawal

    Removing funds from an account, plan, pension or trust. In some ...
  6. Surrender Period

    The amount of time an investor must wait until he or she can ...
Related Articles
  1. Borrowing From Your Retirement Plan
    Retirement

    Borrowing From Your Retirement Plan

  2. Tax Treatment Of Roth IRA Distributions
    Taxes

    Tax Treatment Of Roth IRA Distributions

  3. Tips On How To Use IRAs To Boost Retirement ...
    Retirement

    Tips On How To Use IRAs To Boost Retirement ...

  4. Traditional IRA Deductibility Limits ...
    Retirement

    Traditional IRA Deductibility Limits ...

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center